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Throughout history, the famous statement “this time it’s different” has led to fortunes being made and lost. Usually, in that order.
“Flips are back to 10-year highs”, based on a new report by Attom. But, clearly everybody thinks “it’s different this time” because nobody is talking about it.
Flipping makes the housing market much more volatile in several ways, as we learned from 2003 to 2007.
A few notable ways are:
- Flips artificially skew-higher the popular house price indices, such as Case-Shiller. For example, using data from this report, if flips make up 6% of all purchases, at a 50% gross profit, it will add 3% onto the Case Shiller headline number, even if the remaining 94% of house sales prices were flat.
- Flips artificially boost organic demand metrics in the popular, high-frequency Existing Home Sales and Pending Sales reports, because the same house is counted twice within a year period, before it lands in the hands of the final end-user, or investor.
- Flips, used as comparable sales in residential appraisal reports, artificially boost the perceived “value” of similar, perhaps non-renovated houses, leading to buyers over-paying, and lenders over-lending. This is particularly dangerous when a down-cycle comes, especially in this era of little to no money down, as the “froth” will come off first, leading to a quicker and larger wave of negative equity.
- Flipping removes much needed lower-price-band supply and magically turns it into higher-price-band supply, exacerbating the “distribution” problem in America being mistaken for a “lack of supply”.
- Flips, fully renovated, hurt demand for newly built homes by America’s home builders, which accounts for the continuous low-level of “New Home Sales” relative to previous cycles going back decades.
- Flipping makes real estate, ancillary, mortgage, and retail numbers appear better than macro organic, economic conditions would support. In other words, if an end-user buys a house, they may “update it”. If a flipper buy it, they may gut it and completely “redo” it. In fact, Home Depot and Lowe’s stock performance is mirrored in the “Home Flipping Profit Trends” chart below.
Finally, the flip heatmap below LOOKS IDENTICAL to high-density flip regions in BUBBLE 1.0. So, if it grows like a bubble, and blows like a bubble, chances are it’s not “organic, fundamental, economic growth”.
There are a bunch of other good data in this report, when coupled with my proprietary MLS based data, provides a deep dive into core, leading-indicating, regions that I am watching close, which already appear to be rolling over. But, I will save that for a later note.
- Mar 7, 2017
Average Gross Flipping Profits and ROI at New Record Highs;
Number of Investors Flipping at 9-Year High, Share Financed by Flipper at 8-Year High;
Median Age of Homes Flipped at New High, Median Square Footage at New Low
IRVINE, Calif. – March 9, 2017 — ATTOM Data Solutions, curator of the nation’s largest fused property database, today released its 2016 Year-End U.S. Home Flipping Report, which shows that 193,009 single family homes and condos were flipped — sold in an arms-length transfer for the second time within a 12-month period — in 2016, up 3.1 percent from 2015 to the highest level since 2006, when 276,067 single family homes and condos were flipped.
Home flips in 2016 accounted for 5.7 percent of all single family home and condos sales during the year, up from 5.5 percent in 2015 to a three-year high but still well below the peak in 2005, when 338,207 single family homes and condos were flipped representing 8.2 percent of all sales.
For this report, a home flip is defined as a property that is sold in an arms-length sale for the second time within a 12-month period based on publicly recorded sales deed data collected by ATTOM Data Solutions in more than 950 counties accounting for more than 80 percent of the U.S. population (see full methodology below).
The report also shows that 126,256 entities — including both individuals and institutions — flipped homes in 2016, up less than 1 percent from 2015 to the highest number since 2007, when 143,266 entities flipped properties.
Meanwhile, the share of flipped homes that were purchased by the flipper with financing increased to an eight-year high of 31.5 percent in 2016 while the median age of homes flipped increased to 37 years — a new high going back to 2000, as far back as data is available — and the median square footage of homes flipped decreased to 1422 — a new record low going back to 2000.
“Home flipping was hot in 2016, fueled by low inventory of homes in sellable or rentable condition along with a flood of capital — both foreign and domestic — searching for the returns and stability available with U.S. real estate,” said Daren Blomquist, senior vice president at ATTOM Data Solutions. “The combination of more home flips and a greater share of financing for flip purchases resulted in a 19 percent jump in the estimated dollar volume of financing for home flip purchases, up to $12.2 billion for the flips completed in 2016 — a nine-year high.”
“Investors in search of flipping returns are increasingly willing to move to secondary and tertiary housing markets and neighborhoods with older, smaller properties that are available at a deeper discount,” Blomquist continued. “Given that many of these markets are more affordable, we are also seeing a higher share of the flipped homes sold to FHA buyers, with that share reaching a four-year high of 19.6 percent in 2016.”
Home flipping profits reach new record high in 2016
Homes flipped in 2016 sold for a median price of $189,900, a gross flipping profit of $62,624 above the median purchase price of $127,276 and representing a gross flipping return on investment (ROI) of 49.2 percent. Both the gross flipping dollar amount and ROI were the highest going back to 2000, the earliest home flipping data is available for this report.
Among 117 metropolitan statistical areas with at least 250 home flips in 2016, there were 11 with an average gross flipping profit of $100,000 or more in 2016: San Jose, California ($145,750); Boston, Massachusetts ($140,000); San Francisco, California ($140,000); New York, New York ($127,250); Los Angeles, California ($127,000); San Diego, California ($111,000); Oxnard-Thousand Oaks-Ventura, California ($105,000); Seattle, Washington ($102,000); Vallejo-Fairfield, California ($101,000); Baltimore, Maryland ($100,500); and Washington, D.C. ($100,000).
“Our strong wage growth is still supporting rising home prices, which when combined with the historically low number of homes for sale in Seattle, gives home flippers substantial returns on their investments,” said Matthew Gardner, chief economist at Windermere Real Estate, covering the Seattle market. “I believe flipping serves as a negative for any housing market because it further erodes housing affordability, but if there’s a demand for it in the market, it’s a trend we will continue to see.”
Highest gross flipping returns in Pennsylvania, Ohio and Louisiana metros
Among the 117 metro areas analyzed in the report, those with the highest gross flipping ROI were East Stroudsburg, Pennsylvania (241.5 percent); Pittsburgh, Pennsylvania (130.0 percent); Cleveland, Ohio (116.2 percent); Philadelphia, Pennsylvania (107.1 percent); Toledo, Ohio (102.0 percent); and New Orleans, Louisiana (101.2 percent).
Along with Pittsburgh, Cleveland, Philadelphia and New Orleans, other metro areas with a population of at least 1 million and a gross flipping ROI in 2016 of 75 percent or higher were Baltimore (96.6 percent); Cincinnati (87.2 percent); Buffalo (85.8 percent); Rochester (76.2 percent); Oklahoma City (76.1 percent); Chicago (75.9 percent); Jacksonville, Florida (75.8 percent); Memphis, Tennessee (75.6 percent); and Grand Rapids, Michigan (75.0 percent).
Highest home flipping rates in Tennessee, California and Florida metros
Among 117 metropolitan statistical areas with at least 250 home flips in 2016, those with the highest home flipping rate as a percentage of all home sales were Memphis, Tennessee (11.7 percent); Clarksville, Tennessee (10.1 percent); Visalia-Porterville, California (10.1 percent); Tampa-St. Petersburg, Florida (9.9 percent); and Deltona-Daytona Beach-Ormond Beach, Florida (9.9 percent).
Along with Memphis and Tampa-St. Petersburg, other metro areas with a population of at least 1 million and a 2016 home flipping rate of at least 7 percent were Las Vegas (9.2 percent); Miami (8.8 percent); Orlando (8.3 percent); Phoenix (8.0 percent); New Orleans (7.9 percent); Jacksonville, Florida (7.7 percent); Virginia Beach (7.6 percent); Baltimore (7.4 percent); Birmingham (7.4 percent); St. Louis (7.1 percent); and Nashville (7.1 percent).
Biggest increase in home flipping rates in Pennsylvania, Nebraska, and New York metros
Among 117 metropolitan statistical areas with at least 250 home flips in 2016, those with the biggest year-over-year increase in the home flipping rate were Reading, Pennsylvania (38.8 percent); Lincoln, Nebraska (38.6 percent); East Stroudsburg, Pennsylvania (36.6 percent); Rochester, New York (31.8 percent); and Allentown, Pennsylvania (29.3 percent).
Along with Rochester, other metro areas with a population of at least 1 million and an annual increasing in home flipping rate of at least 10 percent were New Orleans (up 26.5 percent); San Antonio (up 25.2 percent); Dallas (up 20.9 percent); Boston (up 16.4 percent); New York (up 16.0 percent); Columbus, Ohio (up 14.6 percent); Oklahoma City (up 13.8 percent); Philadelphia (up 11.6 percent); Cincinnati (up 11.5 percent); Grand Rapids, Michigan (up 11.3 percent); Charlotte (up 10.5 percent); Kansas City (up 10.4 percent); and Cleveland (up 10.2 percent).
39 zip codes where at least one in five home sales was a flip in 2016
Among 5,625 U.S. zip codes with at least 10 homes flipped in 2016, there were 39 zip codes where at least 20 percent of all home sales during the year were home flips, including zip codes in Texas, Tennessee, Florida, California, Ohio, Virginia, Pennsylvania, Missouri, Washington, the District of Columbia, Maryland, New York and New Jersey.
In the Los Angeles metro area, which accounted for six of the 39 zip codes with a home flipping rate of at least 20 percent in 2016, the best opportunity for flipping is in lower-priced neighborhoods with properties that need significant repairs, according to Brett Chotkevys, co-founder of Helpful Home Solution, which flips properties in Los Angeles and other parts of Southern California.
“We do pretty much a full gut on the houses we buy. Most of those we buy are pretty nasty … they’re falling down, there are druggies living there,” said Chotkevys, noting that a typical rehab for his LosAngeles flips will run $40,000 to $50,000, and it’s not “inconceivable” for him to spend six figures on a Los Angeles fix-and-flip. “We like south central (Los Angeles) a little bit more. The barrier to entry is lower. We can pick up properties in the 200s. … There are normal people not making gobs of money that can afford to buy these houses.
“With us being where we are in the cycle, and us being very near the top, we’re not buying any big properties, anything close to a million, and trying to flip those,” Chotkevys added.
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